With their superior financial planner available to all, Wealthfront is one of the best-rated robo-advisors on the market. But is that merit justified?
To start, you simply fill out a questionnaire form to give them an indication of your financial goals and risk tolerance levels. Their computer-generated algorithms formulate the most suitable investment strategy on the basis of this data and automate the investment process for you.
There's absolutely no human involvement in the process. Since pioneering the robo-advisory industry together with Betterment, this is an area where the two companies have grown apart. In fact, it's allowed Wealthfront to offer lower management fees than their main rival (and private financial advisors).
Wealthfront has three main services to offer you:
- Automated investments in exchange-traded funds (ETFs), including automatic portfolio rebalancing to stay in-line with your stated financial goals and risk tolerance
- Free, software-based financial advice to assist you in planning how to achieve those financial goals, such as retirement
- The Wealthfront Cash Account, a high-yield savings account with an annual percentage yield (APY) of 2.24% (subject to fluctuation), rivaling that of CIT Bank's Premier High-Yield Savings Account – only 1.55% APY – while also offering FDIC insurance up to $1 million.
Another innovative service that Wealthfront provides is the ability to take out a loan against your portfolio. To qualify, you need to have a minimum account balance of $100,000.
Considering their management fees are only 0.25% – an industry standard for online discount brokerages – this is an impressive array of financial services. Considering many of their competitors also charge higher fees and/or have a pricing tier, it's refreshing to see that Wealthfront has remained affordable for beginner investors.
That said, for many beginners (and even many more experienced traders), having access to a human advisor can be invaluable. Wealthfront is digital-only.
So is it really worth it?
This is what we aim to clarify via our Wealthfront review.
- Management fees: 0.25% on all managed assets, deducted monthly; there are several free services as well
- Account minimum: $500
Wealthfront is Best For
Wealthfront is a stellar robo-advisor, but they're better for certain types of investors than others. They also stand out for a few of their features.
We find the firm is best for:
- Novice investors who are uncertain about how to select the best investment opportunities
- Those who prefer a hands-off investment process
- Investors in need of 529 college savings plan management
- Those investing in their future with a retirement plan
- Taxable accounts
- Free financial tools and a complementary dynamic financial plan (also available to noncustomers)
Wealthfront has one of the longest histories in the robo-advisor industry (only Betterment has a longer track history, and not by much). That gives them an undeniable edge over most of their competition. After all, they've had more time to iron out the wrinkles.
Here's what we love the most about Wealthfront.
+Investment Authority & Range
Wealthfront is backed by some of the heaviest hitters in the investment industry. One of these is Chief Investment Officer Burton Malkiel, the author of one of the most important trade books, A Random Walk Down Wall Street, as well as senior economist at Princeton University.
Thanks to the high expertise level in Wealthfront's upper echelons, the company's methodology employs a streamlined questionnaire designed to pinpoint risk tolerance and financial goals.
Computer-generated algorithms then automate the selection of exchange-traded funds (ETFs) from up to eleven asset classes.
Rather than rebalancing asset allocations on a quarterly or yearly schedule, Wealthfront uses a threshold-based system. Any time an asset class deviates from a managed portfolio's target allocation, dividends are reinvested, a distribution taken, the market fluctuates, if you make a deposit, your portfolio is optimized through rebalancing.
Wealthfront provides some base diversification by splitting your investments between those eleven asset classes (typically six to eight per portfolio), which are:
- U.S. stocks
- Foreign stocks
- Emerging markets
- Dividend stocks
- Real estate
- Natural resources
- Emerging markets bonds
- Treasury inflation-protected securities
- U.S. government bonds
- Corporate bonds
- Municipal bonds
The robo-advisor also introduced the Wealthfront Risk Parity Fund in early 2018, which offers more exposure to asset classes carrying higher risk-adjusted returns. Risk Parity is only available to customers with a taxable account balance of $100,000+.
You should bear in mind that while the expense ratio for the Wealthfront Risk Parity Fund is lower than comparable offers by other brokerages, it does cost more than other funds Wealthfront offers. The company also benefits directly from its risk parity fund, as the expense ratio is paid to them.
Wealthfront charges a very reasonable asset management fee of 0.25%.
The only other fees you'll be charged are ETF expense ratios, which typically range from 0.08% to 0.12%. Or, if you opt for the Risk Parity Fund, 0.25% – the only expense ratio Wealthfront benefits from (as mentioned above).
Wealthfront does not charge any fees for opening or closing your account, withdrawals, account transfers, or trading/commission fees.
Considering the account minimum of just $500, that's a pretty good deal. Even though many of their competitors have no account minimums, they usually charge higher management fees.
For investors transferring assets to the firm, Wealthfront offers a Tax-Minimized Brokerage Account Transfer service. This helps to incorporate existing assets into your Wealthfront portfolio as far as possible. Any securities that are transferred but can't be incorporated are held until their capital gains become long-term.
Tax-loss harvesting is a huge consideration, especially for wealthier traders. When your investments perform poorly, Wealthfront uses tax-loss harvesting to improve your returns. All you need is a taxable account with a minimum of $100,000.
It's significantly harder to employ tax-loss harvesting strategies when investing in indexes, which is why Wealthfront uses stock-level tax-loss harvesting. The company replicates the index to allow their software to crawl for individual opportunities to perform tax-loss harvesting. The savings are then reinvested, compounding potential impact.
When your account reaches $500,000, the service is further improved through a multifactor smart beta strategy. Here, multiple factors – such as high dividend yield and low volatility – are considered in further optimizing your potential returns.
+Financial Planning with Path
An especially exciting feature is Path – a financial planner that helps users save for specific goals (that you can set yourself).
For example, if you're looking to buy a house, retire, or pay for college, Path will help you achieve that goal. And the best part is, it isn't just free for Wealthfront customers – anyone can use it.
If you're looking to plan your retirement, Path analyzes your current spending activity (you'll need to link your bank account/s for this) as well as government data on how those spending patterns tend to change with age. Once the computer-generated algorithms have finishing parsing this information, it provides an estimate for what your spending will likely be once you retire.
The home-planning tool, on the other hand, analyzes your financial situation, mortgage rates, and real estate prices and gives you an estimate of how much you can afford to spend on a home. You can also adjust the savings time frame. After all, if you save up for ten years instead of five, you'll be able to afford a higher mortgage. Path will also offer advice on how to optimize your savings strategy to help you afford a better home sooner rather than later.
For college savings, Path lets parents select what college they plan to send their child to. Path will then give you an estimate of the costs and financial aid options before providing a monthly savings plan. You can also link an existing 529 college savings plan (or open one with Wealthfront) and enjoy financial guidance for a maximum fee of 0.46%.
Time Off for Travel, Path's sister financial planner, will help you estimate how much time you can afford to take off for traveling. Not only that, but the program will help you figure out how much you can afford to spend – and how it'll affect your other savings goals.
If you have at least $100,000 in your Wealthfront accounts, you can take out a loan against your portfolio (up to 30% of your portfolio's value). You won't have to submit any applications, submit to a credit check, or pay any fees.
Wealthfront currently charges 4.5% to 5.75% annual interest rates.
As mentioned earlier, Wealthfront – like some of its competitors – now offers a high-yield savings account. Introduced in early 2019, the Wealthfront Cash Account is FDIC insured for up to $1 million, has unlimited transfers, and no fees whatsoever.
Best of all? Its APY is an impressive 2.24% – more than double a regular savings account.
Wealthfront has a lot going for it. As we pointed out earlier, having been founded in 2008, the company has had more than a decade to smooth out the wrinkles.
But of course, no company is perfect. Here's where Wealthfront slightly disappoints.
While this may actually be considered a pro by some, we're hesitant to agree.
The robo-advisor model may be built specifically for automated investment account management based on computer-generated algorithms, but as we mentioned in our introduction… having access to a human advisor can be invaluable.
This is especially true when you're just starting out. It helps to be able to get on the phone and have another person to talk you through things you don't understand or offer advice. AI hasn't quite advanced to the point where it can simulate the human touch yet. That's something you might miss with Wealthfront – even if the human touch also means an increased risk of human error.
However, the company largely off-sets this issue with its extensive, blog-based knowledge library.
-No Fractional Shares
Because Wealthfront doesn't buy fractional shares, they aren't going to be able to invest your full deposit.
That means you're left sitting with a cash balance that isn't being invested. In fact, Wealthsimple purposefully maintains this cash balance, equal to the total of your projected fees for the next year. This causes cash drag.
Granted, Charles Schwab has a much higher percentage allocation for cash balances – 6%.
But there are other robo-advisors (such as Betterment) who do buy fractional shares and minimize or even eliminate cash drag.
Is Wealthfront Right For You?
Wealthfront is one of the cheapest, most cost-effective robo-advisories on the market. And you don't pay through lowered quality standards.
In fact, we'd argue that Wealthfront is one of the best online discount brokerages. Their stock level tax-loss harvesting, superior financial planning tools and resources, and the fact they offer their own 529 college savings plan, makes them a highly attractive company.
However, while it's easy to get around it being a digital-only platform, Wealthfront's propensity for intentional cash drag will give discerning investors reason to pause.
As always, we advise that you give every aspect of any brokerage full consideration before making a decision.
Beginners and more experienced traders will all find a lot to love about Wealthfront, as you've seen throughout this review. And this is especially true for first-time investors with limited funds, thanks to the company's low fees and minimal investment requirements.
The biggest factors you'll need to consider against all their benefits are, as mentioned above, their lack of fractional shares and the fact everything is digital.
Of course, Wealthfront's primary target market is the millennial generation. An app-based automated investment platform is one of the best ways to lock that target market in.